ETFs have been one of the most significant innovations in the last 30 years as far as investors and traders are concerned.
ETF stands for Exchange Traded Fund, but it could just as easily be Exchange Traded Friend.
Why do I say that?
Well, I am not talking about the returns from the asset class, although to be fair passive index trackers have become one of the most successful investment vehicles, thanks to the combination of market returns and low costs.
Of course, trading or investing in ETFs is subject to the same constraints as anything else.
This means that you have to have your asset selection, timing and trade direction correct to make money trading them.
I think of ETFs as friends because of the information they can impart.
A time before abundant data
I can remember a time when ETFs weren’t commonplace, when data on indices, sectors, investment styles and factors, was hard to come by, even if you were a pro trader or analyst.
If you had a Bloomberg terminal and the patience to find and crunch the numbers, then you could discover hidden nuggets of information that could give you an edge.
If you didn't then you were out in cold.
If you were lucky you might catch some tantalizing, and frustrating, glimpses of the kind of data that could put you in the game, from other sources.
However, the spectacular growth in ETFs and the tidal wave of information about them, that growth created, has changed all that.
You may wonder what I am talking about well let me show you what I mean through the lens of a real-world example.:
What do I know about Mexico?
Not a huge amount!
I know it shares a border with, and is a large trading partner of the USA, and as a result, it's part of NAFTA.
I know Mexico City is one of the world’s largest and most densely populated urban areas.
And of course, I enjoy the food, or at least the version of Mexican food that we get to try here in Europe.
Has this article suddenly become a travelogue?
Don't worry it hasn't but some of the things I have mentioned above, make the Mexican market interesting to traders.
Consider these tables from Bank of America’s weekly Flow Show report, and note what was towards the button of the equities columns
Making me Smile
Now take a look at this chart, from July 3rd, which tracks and captures the relative strength and weakness, in the price action of a universe of popular US-listed ETFs.
What I like to call my Smile charts- The name smile comes from the pattern or distribution that are formed in the chart.
However, these charts also make me smile because of the intelligence that they contain and surface.
ETF Smile 03-07-2024: The higher to the right -the better the relative price action
Source: Darren Sinden
In this case if we look to the upper right-hand side of the chart we can see EWW the iShares MSCI Mexico ETF. Which tracks the performance of a broad-based index of Mexican equities.
It’s official
EWW showed up in positive positions in my ETF screens several times, such that on the 9th of July I decided it was time to do something about it.
I told members of one of my trading discords that I was now officially watching EWW/Mexico to the upside.
I shared a list of the ETF's top holdings and picked out building materials group Cemex as a stock to focus on.
Source: iShares
Cemex trades as an ADR, or American Depositary Receipt in the US, so I shared that chart too, complete with 10 and 50-day MA lines and downtrend line as well.
Source: Barchart.com
Fast forward to July 10th
EWW rallied by +2.20% taking its weekly gains to +4.42% in the process.
The price of Cemex ADRs leapt by +6.56%- the big green candle on the right- in the chart above.
Source: Brchart.com
Thinking smarter not working harder
I didn't have to do any hard work here.
True, I had to identify the fact that EWW was making bullish noises - but I have already created a system to do that for me. And you could achieve similar with a watchlist and performance table.
I had to be aware that Mexican equities were underperforming - but again, a simple Google search would have unearthed that.
The table of EWW holdings is available from the iShares/ ETF website and then it was just a case of looking at some charts and picking stock that showed upside potential.
Of course, I couldn't be sure of the timing or what the catalyst would be to get things moving.
But intuitively I felt sure it was in the offing and that I wouldn’t be the only one in the market who was aware of this opportunity.
Judging by the move in Cemex, my intuition was correct.
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